- Australian Securities and Investments Commission v Franklin

Supreme Court of NSW|2014-11-28|Before: Black J

Solicitors: Henry Davis York (Plaintiffs/Applicants) Bridges Lawyers (Defendant/Respondent) File Number(s): 2013/295983

Judgment The nature of the application

By Interlocutory Process filed on 3 October 2014, the Plaintiffs, Messrs Kogan and Hayes in their capacity as receivers and managers ("Receivers") of the Anglican Development Fund Diocese of Bathurst Board (receivers and managers appointed) ("ADF"), seek an order that they be permitted to make an interim distribution to the creditors of ADF in accordance with a distribution schedule ("Distribution Schedule") annexed to the application, and a consequential order that the costs of the application be costs of the ADF receivership. That leave is required, before such a distribution is made, under the terms of the orders by which the Receivers were appointed to ADF by the Court.
The Distribution Schedule sets out the funds presently held by ADF, makes provision for certain costs and disbursements presently unpaid and for future costs, including legal costs, referable to proceedings to which I will refer below, and identifies the amount available for distribution to creditors as exceeding $6.7 million. Four claims, including claims by the Anglican Property Trust Diocese of Bathurst ("APT"), the Diocese of Bathurst ("Diocese") and two other entities associated with the Diocese, are then identified as under adjudication, with funds proposed to be set aside, and a claim by the Commonwealth Bank of Australia ("CBA") is identified as adjudicated, with funds proposed to be distributed. The claim by CBA is recorded as exceeding $37.8 million, and the proposed distribution to it is $6,529.377.43. The amount proposed to be distributed to CBA and set aside in favour of the four claimants whose claims are identified as under adjudication would be approximately 7.25% of their respective claims. The proposed distribution would leave the receivers holding approximately $617,000 in their general account and an amount of approximately $338,217 in a deferred proofs account referable to the four claims that are under adjudication.
The application for leave to make an interim distribution is opposed by APT on several bases.

Background facts

I should now set out the background facts to the application. On 30 September 2013, the then solicitors for ADF advised CBA that it could not roll over commercial bills which matured on that day and requested CBA not to roll over those two commercial bills and indicated that an application would be made to the Court for the appointment of a liquidator. Ultimately, an application for the appointment of a liquidator was not made, presumably because ADF was not a corporate entity to which a liquidator could be appointed under the Corporations Act 2001 (Cth). Instead, an application was made by CBA for the appointment of receivers to ADF before the Duty Judge, Rein J, on an ex parte basis on 1 October 2013. Messrs Hayes and Kogan were initially appointed as receivers of ADF by an order, implicitly of an interim character, on that date, made under s 67 of the Supreme Court Act 1970 (NSW) which conferred on them the powers specified in s 420(1) - (2) of the Corporations Act as if ADF was a corporation to which that section applied.
Correspondence then took place between the solicitors for ADF or its board and the solicitors for CBA, which are the same firm of solicitors who now act for the Receivers, in respect of the entry into further consent orders. By email dated 1 October 2013, CBA's solicitors advised ADF's solicitors of the appointment of the Receivers on an interim basis. The solicitors for ADF responded on the same date confirming receipt of the orders and summons and their instructions to accept service on behalf of the board of ADF and foreshadowing a meeting between the parties "to discuss a way forward".
The matter was again mentioned before Windeyer AJ on 8 October 2013, when Mr Blake SC appeared for ADF. A notice of appearance was filed on that day recording the appearance of ADF, by the solicitors then instructed by ADF's directors, so it is plain that Mr Blake was at that time acting on the instructions of ADF by its directors.
By letter dated 10 October 2013 from CBA's solicitors to the solicitors for ADF (marked "without prejudice" but tendered without objection in this application), CBA's solicitors enclosed draft consent orders which provided for a monetary judgment in favour of CBA in the amount of $36,063,742, for interest on that judgment under s 101 of the Civil Procedure Act 2005 (NSW) and for payment of CBA's costs on an indemnity basis, as well as for the continuance of the Receivers' appointment. By letter dated 14 October 2013, the solicitors for ADF commented on the proposed orders, subject to their client's instructions, but raised no issue as to the proposed money judgment in favour of CBA. CBA's solicitors provided a further draft of the orders, which retained the provision for the money judgment in favour of CBA, on 14 October 2013.
The matter was again listed before Rein J on 15 October 2013, when Mr Blake again appeared for ADF. Mr Blake then made clear that ADF had investigated whether it should defend the proceedings brought by CBA and referred to the need for an appropriate regime, presumably the appointment of receivers, where ADF was not incorporated under, and could not be wound up under the Corporations Act. Further orders were made on 15 October 2013 including, by consent, judgment for CBA in the amount of $36,063,742 and an order that ADF pay interest on the judgment under s 101 of the Civil Procedure Act and pay CBA's costs on an indemnity basis. Those orders also provided that the Receivers: "… continue to be appointed as joint and several receivers and managers of all of the assets and undertakings of [ADF] for the purpose of equitable execution with the object of ascertaining the assets and the liabilities of [ADF], realising its assets, and distributing after Court approval the assets of [ADF] in payment of its creditors (Purpose), subject to the following: (a) The Receivers to have all of the powers of receivers of a corporation under s 420, s 430 and s 431 of the Corporations Act 2001 (Cth) to attain the Purpose. (b) The Receivers are to take all reasonable steps to ascertain the assets and liabilities of [ADF], including but not limited to any chose in action [ADF] may have against any party. (c) The Receivers are to realise the assets of [ADF], including but not limited to any chose in action [ADF] may have against any party. … (i) The Receivers are to apply to the Court for approval to make any distributions to persons adjudicated to be creditors or for the compromise or forgiveness of any debt owed to [ADF]. …" That order treated the adjudication of a person to be a creditor, implicitly by the Receivers, as anterior to an application to the Court directed to approval of any distribution to such a person.
APT subsequently lodged a proof of debt with the Receivers and, on 10 December 2013, the Receivers sought further information from APT concerning that proof of debt and also drew attention to the possibility that ADF may have claims against the Diocese under guarantees provided by the Diocese in respect of loans made by ADF to other Diocesan entities. A further letter dated 13 December 2013 from the Receivers to APT referred to a transaction involving a repayment to National Australia Bank said to be sourced from the Diocesan Income Account.
An earlier application to make a first interim distribution in the receivership was made by interlocutory process filed on 13 December 2013 and was not opposed, and orders were made by Brereton J permitting that first interim distribution on 18 December 2013. Those orders adopted a similar structure to the orders that are now sought by the Receivers, setting aside funds for distribution to the Diocese, APT and the two other entities associated with the Diocese, the claims of which were then treated as under adjudication, and authorising a distribution to CBA on the basis that its claim had been adjudicated, amounting to approximately 6.1% of their respective claims.
A letter dated 31 December 2013 from the Diocese to the Receivers in turn referred to transactions by which a total of $720,426 of funds of ADF were said to be held by APT; to the return of $80,864 by APT to ADF; and to a balance of $639,561.99 said to be owed by APT to ADF, which was in turn said to reduce the amount of the debt owed by ADF to APT from $1,314,000 to $674,438 and contemplated that APT's proof of debt would be amended on that basis (Ex A2 pp 39 - 40). Further correspondence followed as to the admission of APT's claim against ADF, in which the Receivers raised several questions that have not yet been addressed by APT.
By a letter dated 5 May 2014, APT reasserted a claim for $1,320,470.46 against ADF, without allowing for the set-off of ADF's claim against it to which the Diocese had previously referred in the letter of 31 December 2013, and without explaining the apparent change in position. Ultimately, the position in respect of APT's proof of debt was not a matter of controversy in this application, and the Receivers have now brought a separate application seeking directions from the Court as to issues arising in respect of the treatment of that proof of debt.
In March 2014, the Receivers caused ADF to commence two proceedings in the Commercial List of this Court. The first proceedings ("Guarantee Proceedings") was brought against the Bishop of the Diocese of Bathurst and other persons in respect of guarantees said to have been given by the Bishop in respect of loans made by ADF and interest. The relief sought in the Guarantee Proceedings is, broadly, to require a number of defendants to take steps to direct APT and other defendants to realise assets of the Diocese and pay the net proceeds to the Receivers. The second proceedings ("Officers Proceedings") were brought against the former Bishop of the Diocese and other persons who constituted the board of ADF, seeking compensation under s 1317H of the Corporations Act in the amount of $24,553,410 plus interest, or alternatively damages and interest. The Commercial List Statement in respect of those proceedings alleged that the defendants had failed to exercise reasonable care and diligence in making and managing the relevant loans and failed to exercise their powers and discharge their duties in good faith and in the best interests of ADF, and advanced claims under ss 180 - 181 of the Corporations Act and for breach of fiduciary duty. APT is not party to the Officers Proceedings.
The former Bishop and others filed a Defence in the Officers Proceedings on 21 August 2014 and a First Cross-Claim Cross-Summons on 22 August 2014, which sought an orders under s 12GM of the Australian Securities and Investments Commission Act 2001 (Cth) ("ASIC Act") or in the Court's equitable jurisdiction that, by reason of CBA's alleged unconscionable conduct, CBA be enjoined from enforcing the CBA facilities against ADF, and damages under s 12GF of the ASIC Act in respect of any liability of the Cross-Claimants to ADF. APT was also not party to that cross-claim. The Commercial List Cross-Claim Statement, also filed on 22 August 2014, in turn referred to representations alleged to have been made by CBA in the course of a tender process or prior to entry into the relevant facilities and other conduct, which certain of the Cross-Claimants are said to have relied on in approving and making certain loans to other entities. Paragraph 16 of the Cross-Claim Statement alleged that CBA had caused the Receivers to be appointed to ADF and instructed the Receivers to cause ADF to bring proceedings against the defendants in those proceedings and paragraph 17 of the Cross-Claim Statement contended that, by reason of specified matters, it would be unconscionable (within the meaning of the unwritten law and ss 12CA and 12CB of the ASIC Act) for CBA to enforce the CBA facilities against ADF, except to the extent of the assets referred to in paragraph 6 of the Cross-Claim Statement, or to cause ADF to sue the Defendants in the Officers Proceedings. It appears that the reference to paragraph 6 in that paragraph should be a reference to paragraph 7 of the Cross-Claim Statement, which in turn alleged that CBA knew that: "7.4 The ADF had no capacity to repay funds borrowed under the CBA facility for the MAGS loans or the OAGS loans other than: 7.4.1 By recovering the assets of MAGS or OAGS; 7.4.2 Out of ADF's own limited funds; 7.4.3 By enforcing the Bishop's Guarantee or otherwise obtaining assets or funds from entities within the Diocese of Bathurst in reliance on the Bishop's Guarantee."
It is not alleged in that Cross-Claim Statement that there was any unconscionable conduct by CBA, or indeed by the Receivers, in respect of the entry of the consent judgment to which I referred above. That is perhaps not surprising, where that consent judgment was entered with the consent of ADF, represented by Senior Counsel and solicitors acting on the instructions of its then directors. The Guarantee Proceedings and the Officers Proceedings have been listed for a hearing of three weeks commencing in mid-April 2015.
CBA commenced proceedings number 2014/75947 ("CBA Proceedings"), at the same time as the Guarantee Proceedings and against substantially the same defendants. In those proceedings, CBA seeks performance of obligations imposed on a number of defendants under a letter which it contends was a guarantee given to it in respect of loans it made to ADF. APT contends the issues raised in the CBA Proceedings are "almost identical" to those raised in the Guarantee Proceedings. The Receivers respond to APT's submission of identity of issues between the Guarantee Proceedings and the CBA Proceedings by pointing out that, although there are common issues in the proceedings, the former relate to a letter provided in favour of CBA in respect of ADF's indebtedness to CBA, whereas the latter relate to a different letter given to ADF in respect of other parties' indebtedness to it. The proceedings therefore relate to separate matters, although they raise common legal issues.

Evidence in the application

The Receivers' application for approval of the interim distribution is supported by affidavits of the Receivers, Mr Hayes dated 3 October 2014 and Mr Kogan dated 17 October 2014. The Receivers' affidavits outline the present status of the receivership, including several of the matters to which I have referred above, and the steps taken by the Receivers to identify creditors of ADF, including review of the accounting records and other books and records of ADF and advertisements published in regional newspapers and a national newspaper. That evidence indicates that the determination of proofs of debt lodged by the Diocese, APT and the two other entities associated with the Diocese have been deferred pending receipt of further particulars of the debts claimed, and the proof of debt by the CBA for $37,849,259 has been admitted. There is also evidence that the Receivers are satisfied: "… that the provisions made as set out in the Distribution Schedule … will be adequate for the Receivers to pay the Deferred Proofs in the event the Receivers were to accept their claims (which claims are currently being considered by the Receivers and are fully provisioned for in the Deferred Proofs Account) and otherwise to carry out their duties in the ADF Receivership."
APT did not rely on any affidavit evidence in opposing the Receivers' application for leave to make an interim distribution, but tendered a substantial volume of documents in respect of the application.

The issues in dispute

The basis on which the Receivers supported the interim distribution, in their initial outline of submissions, was straightforward. They submitted that the proof of debt lodged by the CBA reflected its judgment debt against ADF for $36,063,742.57 plus interest; that CBA's proof of debt had been admitted; that issues remained to be resolved in respect of the four other claimants, including APT; and that the Receivers proposed to put aside sufficient funds in the deferred proofs account to pay claimants whose proofs of debt were deferred, in the same proportion as the claim of CBA was paid, if those proofs were ultimately admitted. APT advanced much more elaborate grounds in opposing the proposed interim distribution in its opening submissions dated 31 October 2014. APT also provided, at my invitation, Points of Contention which set out the basis of its opposition to the interim distribution in summary form. It will be convenient to approach the issues raised by APT in the order they are raised in those Points of Contention, and to refer to the more detailed written and oral submissions made by APT and the Receivers' response to them in that context.

APT's proof of debt

APT initially contended that the Receivers should admit and pay APT's proof of debt, subject to the set-off raised in APT's letter dated 31 December 2013, prior to making any interim distribution to CBA. APT advanced detailed submissions as to the position in respect of its proof of debt, and its background in respect of a payment of $1,314,000 to NAB to discharge a bill held by the Macquarie Anglican Grammar School ("MAGS"). The Receivers in turn respond to the matters raised by APT in respect of its proof of debt. It is not necessary to deal with APT's submissions or the Receivers' response in respect of this matter in dealing with this application. The Receivers have now sought directions from the Court as to the approach to be adopted in respect of APT's proof of debt. APT did not rely on this matter as reason not to make the interim distribution at the hearing before me.

Possibility of liability of CBA to ADF

The first and second matters raised in APT's Points of Contention is that: "The terms of paragraphs 4(a), (b) and (c) of the orders made on 15 October 2013 [Ex A2, p2] and the issue of the First Cross-Claim, Cross-Summons [Ex A1, Tab 7] and the Cross-Claim Commercial List Cross-Claim Statement [Ex A1, Tab 8] required the Receivers to, at the very least: (a) Consider whether [CBA] has any liability to ADF; (b) Consider what impact, if any, the consent judgment entered in favour of [CBA] on 15 October 2013 [Ex A2, p 2] ("the Consent Judgment") has on any liability which [CBA] has to ADF." APT's first and second contentions set out above are addressed to the possibility of liability of CBA to ADF, and to consideration of the effect of the consent judgment on such liability, if it existed.
APT submitted that, given the substance of the Cross-Claim, the Court's orders compelling the Receivers to ascertain and realise any chose in action that ADF has against any party, the duties owed by the Receivers, the fact that the relevant loan agreements were agreements between CBA and ADF and that the Receivers have all the books and records of ADF, then: "The Receivers should have investigated whether ADF should take any action against [CBA] with a view to relieving ADF of some or all of its liability to [CBA]. Neither the Cross-Claim nor the potential liability of [CBA] to ADF is addressed in the Receivers' affidavits." APT also submitted that the Receivers had not placed evidence before the Court that showed that they had considered "the potential liability of [CBA] to ADF". The formulation of that submission presupposed, of course, the potential for such a liability which required such consideration by the Receivers.
As Mr Bell SC, who appeared with Ms Beechey for the Receivers, points out, a first difficulty with APT's contentions in this regard is that the Receivers had determined to admit CBA's proof of debt - which reflects an assessment of the claims as between CBA and ADF - prior to the filing of the First Cross-Claim in the Commercial List Proceedings by the former Bishop and others. The determination of that proof of debt implicitly involved a determination that CBA did not owe an amount to ADF which could properly be set-off against ADF's liability to CBA and, to the extent, the Receivers have necessarily addressed that question. No party, including APT, has brought an appeal from that decision under s 1321 of the Corporations Act in the period since it was made. The Receivers have also, without objection by APT, acted on that determination in making a first interim distribution, which was approved by the Court also without opposition by APT.
A second difficulty with APT's contentions in this regard is that neither APT in these proceedings nor the Cross-Claimants in the Officers Proceedings has identified any claim which would give rise to liability of CBA to ADF, the possibility of which is the premise of both the first and second matters raised by APT. APT, in written submissions, did not itself seek to establish such a liability, but pointed to the fact that the Cross-Claimants in the Officers Proceedings had advanced claims of unconscionable conduct, including within the meaning of ss 12CA and 12CB of the ASIC Act in those proceedings, and sought relief in the Cross-Claim that CBA be enjoined from enforcing its entitlements under its facilities against ADF under s 12GM of the ASIC Act or the Court's equitable jurisdiction and damages under s 12GF of the ASIC Act in respect of the Cross-Claimants' liability to ADF. That formulation accurately summarised the relief sought in paragraph 1 of the relief claimed in the First Cross-Claim; however, the matters identified in the Cross-Claim Commercial List Cross-Claim Statement as supporting that relief are narrower, asserting only that it would be unconscionable for the CBA to enforce the relevant facilities against ADF, except to the extent of the assets referred to in the specified paragraph of the Cross-Claim to which I referred above.
APT also submits that, if the Cross-Claimants' primary relief in the Cross-Claim is successful, then "ADF will have either no or a reduced liability to [CBA]". That proposition does not seem to me to accurately summarise the potential outcome of the Cross-Claim, which is directed not to the existence of a liability of ADF to CBA, but to the steps that are available to CBA by way of enforcement of that liability, and to the identity of the assets against which that liability may be enforced. APT's submissions also refer to CBA's "liability under the Cross-Claim", but that submission also requires qualification since the Cross-Claim does not seek to establish a factual or legal basis for any liability of CBA to ADF, but only a restriction on the assets against which CBA can enforce its rights, and a Cross-Claim for damages in favour of the relevant officers who are cross-claimants, if ADF is successful in its claim against them.
With this background, I cannot accept APT's submission that the Receivers must investigate a claim against CBA prior to making a further interim distribution for two reasons. The first is that ADF's liability to CBA is established by a consent judgment to which ADF, then under the control of its directors and represented by Senior Counsel and solicitors, consented. No evidence was led in this application, and no suggestion made, that those persons were not acting properly in taking that course, although I will return to the question of their power to do so below. The second is that, before the Receivers could be required to devote resources or incur costs in investigating the prospect of action against the CBA to relieve ADF of some or all of its liability to CBA, there would first need to be identified facts which might give rise to a basis for such liability. The Cross-Claimants do not seek to do so in the Cross-Claim in the Officers Proceedings, so far as the relief which they seek is limited in the manner noted above, and APT did not seek to do so in this application. So far as APT submits that the Receivers should consider the impact of any consent judgment on any liability of CBA to ADF, it seems to me that that question cannot arise unless any matter has arisen which creates a serious prospect that CBA has any liability to ADF, or that the consent judgment does not have effect in accordance with its terms. A consent judgment will, in the ordinary course, create an issue estoppel that would prevent ADF from departing from the basis of that judgment, unless it is set aside.
I now turn to the next question raised by APT, as to whether the Receivers should be required to consider whether that consent judgment should be set aside before making an interim distribution.

Setting aside the consent judgment against ADF

The third matter raised in APT's Points of Contention is that: "The terms of paragraphs 4(a), (b) and (c) of the orders made on 15 October 2013 [Ex A2, p2] and the issue of the First Cross-Claim, Cross-Summons [Ex A1, Tab 7] and the Cross-Claim Commercial List Cross-Claim Statement [Ex A1, Tab 8] required the Receivers to, at the very least: … (c) Consider whether in all the circumstances and particularly where the Receivers: (i) Were appointed on 1 October 2013; (ii) Were, on 1 October 2013, given all the powers under s 420(2) of the Corporations Act 2001 (Cth) including the power to "defend any proceedings … in the name of and on behalf of" ADF; (iii) Did not appear before the Court on 15 October 2013; and (iv) Did not consent to judgment being entered against ADF, the Consent Judgment is liable to be set aside".
I have set out the correspondence and events leading to the entry of the consent judgment against ADF, at a time it was represented by Senior Counsel and solicitors acting on its directors' instructions, above. APT points to the fact that the Receivers had power to defend any proceedings brought by CBA in the name of and on behalf of ADF, but the existence of power to defend proceedings does not require they be defended absent a serious basis on which to do so. It does not seem to me that the evidence led by APT in this application has identified any serious basis for a defence of the proceedings where ADF's directors had themselves indicated that ADF was unable to roll over the relevant notes and had themselves indicated that they would seek to appoint a liquidator to ADF, and Senior Counsel representing ADF (on the instructions of its directors) had advised the Court (as noted above) that ADF had investigated whether to defend the proceedings before indicating its consent to the judgment against it. It seems to me that there is no reason to defer an interim distribution to allow the Receivers further to consider whether the consent judgment is liable to be set aside where the evidence led by APT identifies no serious basis on which that could occur.
APT also makes detailed submissions as to the circumstances in which the consent judgment was granted, which are directed to impugning the authority of ADF's directors to authorise it to consent to judgment against it. APT submits that the powers of the officers of ADF to deal with property were suspended as a result of the interim appointment of the Receivers on 1 October 2013, although it is not clear that the authorities to which APT refers address the position of an interim as distinct from a final appointment of receivers. In any event, APT properly accepts that the directors of ADF retained residual powers, notwithstanding the Receivers' appointment, although it submits that those powers were limited to powers which were not detrimental to the functions and powers of the Receivers: Re Geneva Finance Ltd; Quigley (rec and mgr of all assets and undertakings of Geneva Finance Ltd (rec and mgr apptd)) v Cook (1992) 7 WAR 496; 7 ACSR 415 at 427; Oswal v Burrup Fertilisers Pty Ltd (recs and mgrs. apptd) [2013] FCAFC 9; (2013) 295 ALR 708 at [73]. In Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd (1969) 92 WN (NSW) 199 at 209, in a passage often cited in subsequent cases, Street J observed that: "A valid receivership and management will ordinarily supersede, but not destroy, the company's own organs through which it conducts its affairs. The capacity of those organs to function bears a direct inverse relationship to the validity and scope of the receivership and management."
That passage was approved by Owen J in Re Geneva Finance Ltd above, where his Honour noted that the identification of the scope of a receivership required a consideration of all the circumstances surrounding the company's affairs and the appointment of the receiver and must be understood with reference to the purpose for which the receiver is appointed. His Honour also observed (at ACSR 428), referring to the decision in Newhart Developments Ltd v Co-Operative Commercial Bank Ltd [1978] 1 QB 814, that the Court should have regard to the effect which the exercise of a power will have on the receiver's functions, rather than concentrating on the identification and delineation of the residual duties reposed in the directors. His Honour summarised the position (at ACSR 429) by observing that: "It is difficult to see why a director should be prevented from taking a step which he believes to be in the interests of the company unless that step would, in the reasonable opinion of the receiver, prejudice the proper administration of the receivership."
In Oswal v Burrup Fertilisers Pty Ltd (recs and mgrs apptd) above, the Full Court of the Federal Court similarly referred to Hawkesbury Development Co Ltd v Landmark Finance Pty Ltd above, Newhart Developments Ltd v Co-Operative Commercial Bank Ltd above and to Re Geneva Finance Ltd above and summarised (at [76]) the residual powers of directors of a corporation in receivership as including a power to cause proceedings to be taken in the corporation's name to enforce rights which the receiver does not wish to pursue, including proceedings against the debenture holder and proceedings challenging the validity of the debenture or charge pursuant to which the receiver was appointed, with the qualification that directors will not be permitted to pursue actions which prejudice the legitimate interests of the receiver or his or her appointor or which will impede the receiver in the proper exercise of his or her functions. It seems to me that a power to bring proceedings against the debenture holder, in a proper case, must also include a power not to bring such proceedings, and to consent to judgment in favour of the debenture holder on the basis that such proceedings would not be brought.
APT submits that the residual powers of the directors of ADF did not extend to enabling them to defend CBA's claim against ADF for judgment where the Receivers were given express power to bring or defend any proceedings in the name of and on behalf of ADF (by reference to s 420(2)(k) of the Corporations Act) and were appointed to wind up ADF and that appointment was a court appointment. I do not accept that submission, at least if it extends to the proposition that the directors of ADF did not have the power to authorise ADF to consent to judgment against it. There is no suggestion that that course was detrimental to the functions and powers of the Receivers, since no basis has been identified to suggest that ADF had grounds to defend CBA's claim against it for money lent by CBA which it had not repaid.
APT also points out that the Receivers expressed the view, in respect of the hearing on 8 October 2013, which was subsequently adjourned to 15 October 2013, that it was not necessary for them to be represented in respect of the question of CBA obtaining judgment against ADF, and it seems to me that that view was correct where that question was then being addressed by ADF's then directors, with independent representation, and there was no suggestion that they would not act appropriately in that regard. APT also submits that: "It may well be open to the Receivers to argue that the consent judgment entered on 15 October 2013 is voidable and should be set aside under Division 4 of Part 36 of the Uniform Civil Procedure Rules 2005 (NSW)." The reference to Part 36 Division 4 of the Uniform Civil Procedure Rules 2005 (NSW) ("UCPR") does not identify which of rr 36.15 - 36.18 APT submits might provide a proper basis for setting aside the relevant order. The evidence led in this application does not seem to me to establish that the consent order was made irregularly, illegally or against good faith for the purposes of UCPR r 36.15; or that it was made in the absence of a party, for the purposes of s 36.16, since ADF was represented when it was made; or that there was any mistake or error in it, for the purposes of r 36.17. Rule 36.18 deals with judgments against a person trading under a business name and has no relevance to this application.
Mr Stack, who appeared for APT, submits that, if the Receivers wished to defend the proceedings brought by CBA, which resulted in the consent judgment, they were empowered to do so by the powers under s 420 of the Corporations Act which were conferred on them, at the point of their interim appointment on 1 October (T57). The fact that the Receivers had power to defend the proceedings does not, of course, establish the basis of any such defence, and APT did not seek to do so in this application. In oral submissions, Mr Stack also developed a variant of the submission, namely, that the Receivers need not have opposed the judgment sought by CBA, to which ADF (by its directors) consented, but instead should have appeared and sought to adjourn that application (T57). That submission has the difficulty that the only matters which have been raised by any party, which might provide any potential basis for opposing the consent order, were not raised until some months later when the Cross-Claim was filed in the Officers Proceedings. Even if the Receivers had adjourned the proceedings for a short time, there would still have been no matter raised by any interested party to cause any question as to the propriety of the position adopted by ADF (by its directors) in consenting to judgment against ADF.
APT also relies on the decision in Logwon Pty Ltd v Warringah Shire Council (1993) 33 NSWLR 13 at 29 as authority that the Court may set aside a consent judgment where it was not properly obtained, and contends that there was here no valid agreement between the necessary parties, which can only be a reference to CBA and ADF acting by an appropriate corporate organ (T59). I do not accept that submission, because it seems to me there was consent to the judgment, by ADF by its appropriate organ, the then directors acting within the scope of their residual authority; the directors were in a position to assess whether ADF should consent to judgment against it; and there was and is no evidence, as I have noted above, that they would not or did not properly do so; and the Receivers had taken no objection to their taking that course.
Mr Bell submitted, in oral submissions, that the final appointment of the Receivers and the grant of their powers occurred on the same occasion as the consent judgment was entered into, and that the members of ADF's board exercised powers to determine whether to defend the proceedings and instead chose to consent to judgment where they had already resolved not to roll over the relevant bills and to appoint a liquidator, had that been possible. Mr Bell also submitted that it would have been inappropriate for the Receivers, who had been appointed on an interim basis for two weeks, to give instructions on behalf of ADF as to how it should have dealt with CBA's claim, where ADF's directors, through its solicitors and Counsel, were consenting to the relevant judgment, and that the board retained residual powers to consent to that judgment (T46). Mr Bell also submitted that that exercise of power was not detrimental to the Receivers' functions and that it was "fanciful" to suggest that, in the relevant factual circumstances, the Receivers would have challenged the consent judgment (T47).
It does not seem to me that any factual basis has been established for a suggestion that the consent judgment would be set aside, either because the Receivers did not consent to it or on any other basis. It does not seem to me that any factual basis has been established for a proposition that the Receivers could not properly have taken the view that, where the directors of ADF, who were independently represented and familiar with the background to the matter, considered that ADF should consent to judgment in favour of CBA, the Receivers, who had then been appointed as interim receivers for about two weeks, should oppose that course.

Whether the proposed interim dividend payment to CBA should not be paid by reason of two other matters

Next, APT's Points of Contention identify an issue whether: "The proposed dividend payment of $6.5 million to [CBA] should not be made at the present time because: (a) The liability of [CBA] to ADF under the First Cross-Claim, Cross-Summons [Ex A1, Tab 7] and the Cross-Claim Commercial List Cross-Claim Statement (Ex A1, Tab 8) has not been determined; and/or (b) There is no evidence before the Court that the Receivers have considered any of the matters identified in paragraph 1 above."
In the course of oral submissions, Mr Stack also observed that APT: "ask[s] rhetorically why there should be any payment at this time until such time as that liability [raised in the Cross-Claim by the Officers Proceedings] has not been determined." (T61) Mr Stack also submitted that the Cross-Claim in the Officers Proceedings may be successful and the CBA may be enjoined from enforcing its facilities. The answer to that rhetorical question seems to me to be that, as I have noted above, the relief sought in the Cross-Claim does not seek to impugn the debt owed by ADF to CBA, or CBA's entitlement to enforce that debt against ADF's assets, nor has APT sought to do so by any application filed in an appropriate forum. The submission that the Court should "simply hold those monies pending the finalisation of those claims" (T62) in turn faces the difficulty that the finalisation of those claims will provide no useful information as to CBA's entitlement to the monies, because those claims do not impugn that entitlement.
Mr Stack in turn submits that: "When a receiver is confronted with the kind of detail set out in the Commercial List Cross-Claim Statement and the Cross-Summons itself, the receivers were duty bound to investigate whether there was a liability." (T62) The difficulties with that proposition seem to be, first, that the Receivers were not confronted with that matter when they allowed CBA's proof of debt, since the Cross-Claim was not filed until some months later; second, that no interested party, including APT, has sought to challenge the decision to allow that proof of debt; and, third, as Mr Bell pointed out and as I noted above, that the matters alleged in the Cross-Claim in the Officers Proceedings did not in fact seek to establish any factual or legal basis for such liability on the part of CBA, as distinct from constraining its ability to undertake enforcement action against assets other than the assets of ADF. Where the Cross-Claim does not articulate a basis for challenge to CBA's right to repayment from ADF's assets, it does not seem to me that its existence gives any reason why an interim distribution should not be made, involving a partial repayment to CBA from ADF's own assets. The additional point raised in this paragraph, that there is no evidence that the Receivers have considered any of the matters identified in the first paragraph of APT's Points of Contention, does not seem to me to raise any issue beyond those which I have addressed in respect of that paragraph above. I am satisfied that the matters raised in this paragraph do not establish reason not to approve an interim distribution to CBA.

Claim for lack of impartiality of the Receivers or their solicitors

The next issue identified in APT's Points of Contention is that: "In light of the matters referred to in paragraphs 1 and 2(b) above, and in view of the dealings disclosed in the evidence, between, on the one hand, the Receivers and/or their solicitors, …, and, on the other, [CBA], it is open to the Court under: (a) Its inherent jurisdiction to supervise and control its officers; and/or (b) Section 423(1) of the Corporations Act 2001 (Cth), to inquire into whether a 'fair minded lay observer would reasonably apprehend' that the Receivers and/or [their solicitors] might not bring an impartial mind to an examination of the matters identified in paragraph 1 above."
Mr Stack referred to the decision in Hall v Poolman [2009] NSWCA 64; (2009) 75 NSWLR 99 at [53], where the Court noted that the virtually identical provisions dealing with controllers' property of a corporation in s 423 of the Corporations Act and with liquidators in s 536 of the Corporations Act are: "a broadly expressed supervisory jurisdiction over the conduct of persons in control of the affairs of a corporation, in circumstances where normal market forces and the exercise by shareholders of their rights to control are attenuated or non-existent. These powers are one part of a range of regulatory powers conferred on the court and/or ASIC to ensure the lawful, orderly and efficient conduct of the affairs of corporations during such a period."
In oral submissions, Mr Stack placed particular emphasis on a complaint of lack of independence on the part of the Receivers and the firm of solicitors acting for them. APT submits that the position of the Receivers is akin to that of liquidators and their duties and obligations are consistent with those of a court-appointed liquidator, so far as the intent of the powers given to them is to call for proofs of debt and make distributions to creditors, in a manner analogous to that which would be undertaken in a winding up. The Receivers submit that APT's characterisation of the receivership as akin to a liquidation may not be accurate, where order 4 of the orders made by the Court on 15 October 2013 referred to the appointment as being "for the purpose of equitable execution", and the equitable execution referred to related to the judgment in favour of CBA, which was made at the same time as that order. The Receivers also submit that the characterisation of the receivership is not relevant to whether a second interim distribution should be made. I do not consider it necessary to resolve the difference between these characterisations of the Receivers' role, given the views that I have reached on other grounds below.
APT also emphasises that the Receivers are receivers appointed by the Court, and that the duty imposed on a receiver appointed by the Court is a "special one", in that he or she is an officer of the Court and owes a duty (whether properly described as fiduciary or not) to persons interested in ADF's property: Cape v Redarb Pty Ltd (No 2) (1992) 8 ACSR 67 at 78; State Bank of New South Wales v Chia [2000] NSWSC 552; (2000) 50 NSWLR 587 at [867]. APT also points out that the Receivers' duties included duties to act fairly and impartially in relation to ADF, its creditors and other persons with legitimate interests in is property; not to place themselves in a position of conflict; and to act in good faith and on proper advice: Cape v Redarb Pty Ltd above at 78; J O'Donovan, Company Receivers and Administrators, (2nd ed looseleaf, LawBook Co) at [23.110]. In Cape v Redarb Pty Ltd (No 2) above at 78-79, in dealing with the position of a court-appointed receiver, Higgins J pointed to the special character of the duty imposed on a receiver appointed by the Court and referred to Re B Johnson & Co (Builders) Ltd [1955] Ch 634 as authority that a court-appointed receiver carries out his or her functions for the company's benefit, by contrast with a receiver appointed by creditors whose duty is owed to the appointing creditors. His Honour also noted, with reference to authority, that: "It is clear that in carrying out his duties the receiver was obliged to act in the interests of and be fair to all parties. … It follows that a receiver should not display partiality to one rather than another beneficiary. … In that respect the receiver is subject to the same duty as a liquidator. … The receiver is required to exercise his powers in good faith and on proper advice. Subject to that, matters of timing and management are properly for the receiver in the exercise of his or her discretion. … That means that, provided a receiver acts according to the dictates of good faith and makes decisions within his or her powers in the interests of the beneficiaries, then the court will not act as some sort of review tribunal as to the merits of such decisions. So long as the impugned decision is one which might lawfully be made the Court ought not to interfere with it. …"
APT also points to the possibility that the Receivers, as officers of ADF, would owe duties under Pt 2D.1 of the Corporations Act, including duties of care and diligence under s 180 of the Corporations Act, to act in good faith and for a proper purpose under s 181 of the Corporations Act, and not to use their position to advantage themselves or someone else or cause detriment to the Company under s 182 of the Corporations Act.
APT submits, and I accept, that the test for independence is whether a fair-minded lay observer might reasonably apprehend that receivers might not bring an impartial mind to the resolution of a relevant question and that test is concerned with the real possibility of a lack of independence: Ebner v Official Trustee in Bankruptcy [2000] HCA 63; (2000) 205 CLR 337 at [6]; Australian Securities and Investments Commission v Franklin [2014] FCAFC 85; (2014) 101 ACSR 87 at [59], [77]. APT also points to the substantial line of cases which have expressed reservations as to the retainer of common solicitors for an insolvency practitioner and a substantial creditor: Smarter Way (Aust) Pty Ltd v D'Aloia [2000] VSC 408; (2000) 35 ACSR 595 at [26]; Commonwealth Bank of Australia v Fernandez [2010] FCA 1487; (2010) 81 ACSR 262 at [89], where Finkelstein J observed that he would go further than Byrne J did in Smarter Way (Aust) Pty Ltd v D'Aloia above and that: "Not only should an administrator not appoint solicitors retained by the secured creditor, they should not appoint solicitors who are on the secured creditor's panel of solicitors. I think that solicitors on a secured creditor's panel are just as likely to be perceived as loyal to the secured creditor as is the solicitor who happens to be retained by the secured creditor." Issues of that kind have also more recently been considered in Re Lorie Najjar & Sons Pty Ltd [2013] NSWSC 798; (2013) ACSR 561 at [136] and Re Colorado Products Pty Ltd (in prov liq) [2013] NSWSC 1613 at [14]. It is difficult to see any reason that a less exacting standard than would be applied to court-appointed receivers than should be applied to voluntary administrators.
APT points to the involvement of the Receivers' firm in matters relating to ADF, before their appointment as court-appointed receivers, including a suggestion made by CBA that the Receivers' firm be appointed to conduct an independent business review of ADF in early 2012 and the subsequent engagement of that firm to undertake such a review in March 2012. APT also points out that the firm of solicitors that now represents the Receivers acted for CBA in its dealings with the Diocese; that the relevant partner of that firm was and is the solicitor on the record for CBA in the proceedings in which the Receivers were appointed and judgment was entered in favour of CBA; and that partner has since acted for the Receivers and acts for them in the Guarantee Proceedings and Officers Proceedings, while another partner of that firm acts for CBA in the CBA Proceedings.
APT also points to records in the Receivers' accounts of meetings with CBA and its (or their) solicitors. There is no doubt that, as Mr Stack points out in submissions, there have been numerous dealings between CBA, the Receivers and their common solicitors in respect of the conduct of the Officers Proceedings and the Guarantee Proceedings, and the Receivers also have reported to CBA as to the conduct of the receivership in a much greater extent than that to the persons associated with the Diocese who claim to be creditors. It should, however, be recognised, as Mr Bell points out, that a degree of consultation with CBA may be expected where CBA is the largest creditor by a very substantial margin and has also indemnified the Receivers in respect of the costs of the relevant proceedings. APT also relies on an indemnity granted by CBA to the Receivers as compromising their independence.
APT points, in particular, to the difficulty of the Receivers taking legal advice concerning potential liability of CBA to ADF, given the connection between CBA on the one hand and the Receivers and their solicitors on the other. APT submits that, given the relationship between the Receivers' firm and CBA both before and after the Receivers' appointment; the relationship between CBA on the one hand and the firm of solicitors now acting for the Receivers and CBA on the other, both before and after the Receivers' appointment; and the significant payments made by CBA to the Receivers and the firm of solicitors acting for the Receivers and CBA , a fair-minded lay observer would reasonably apprehend that the Receivers and/or that firm might not bring an impartial mind to an examination of the potential liability of CBA to ADF.
The Receivers respond that the question of their and their solicitors' independence is irrelevant, where no application has been made by APT or any other person for their removal or replacement. It does not seem to me that this question can be dismissed so simply, where the Receivers are court-appointed receivers and the Court plainly has a continuing interest in the performance of their duties, and where the Court has jurisdiction to deal with a complaint made in respect of the conduct of receivers under s 423 of the Corporations Act and in its inherent jurisdiction.
Mr Bell also submitted that any complaint as to any lack of independent advice would only be relevant so far as it related to the Receivers not having taken independent advice in connection with the decision to admit or reject the proof of debt by CBA. Mr Bell submits that there was no need for the Receivers to take independent advice in connection with the consent judgment, where the consent to that judgment was given by ADF's board, at a time it was represented by its own solicitors and Senior Counsel. He submits that it is artificial to suggest that the Receivers needed independent advice as to whether they should admit a proof of debt based upon a consent judgment (T49). Mr Bell also submitted that the Cross-Claim in the Officer Proceedings, on which APT now relies to seek to impugn the consent judgment, had not been filed at the time CBA's proof of debt relying on the consent judgment was admitted. He submitted that the wider issue of whether the Receivers should properly be taking advice from the same firm as CBA, in respect of wider issues in the receivership, is not properly before the Court in this application and that it is not possible for the Receivers to respond to it, and that a "Chinese wall" has been established within the firm of solicitors acting for the receivers and CBA (T50).
The Receivers also submitted that the indemnity given by CBA does not diminish their independence, and that creditors of ADF other than CBA benefit from CBA's paying the Receivers' costs, which would otherwise be borne by assets of ADF available for distribution to creditors. Obviously, the weight of that proposition is limited to the extent that CBA's debt is substantially the whole of ADF's debt, so that it would bear a substantial part of any such costs in any event. However, it is commonplace for a substantial creditor to fund litigation brought by an insolvency practitioner, and such funding does not, in itself, deprive the insolvency practitioner of independence.
It is, of course, plainly open to the Court to inquire into a controller's actions, under s 423 of the Corporations Act or in its inherent jurisdiction, in respect of a court-appointed receiver, at least if it appears to the Court that the controller has not faithfully performed, or is not faithfully performing, its function, or has not observed, or is not observing, a requirement of the order under which it was appointed, a requirement of the Court or a requirement under the Corporations Act, the regulations or the rules. It is also open to the Court to undertake such an inquiry if a person complains to the Court about an act or omission of a controller of property of a corporation in connection with performing or exercising any of the controller's functions and powers. However, it does not seem to me to be necessary or appropriate to express any concluded view as to the Receivers' position at this stage, prior to dealing with any inquiry which may be raised under s 423 of the Corporations Act. Mr Bell noted, in the course of oral submissions, that the Receivers were, not surprisingly, not in a position to address an allegation as to their independence raised in the course of this application, and it seems to me that there would be a significant degree of unfairness in requiring them to do so in respect of a collateral issue raised in this application, as distinct from an application squarely raised under s 423 of the Corporations Act or in the Court's inherent jurisdiction.
The matters raised by APT may raise a question whether a fair-minded lay observer would reasonably apprehend that the firm of solicitors that acts for CBA would have difficulty in providing, even with fully informed consent, impartial advice as to any claims of its client, ADF, against its other client, CBA, in the matter. Although Mr Bell submitted that there was a "Chinese wall" within the relevant firm, there may be a question as to whether such an arrangement is sufficient or appropriate in a contentious matter. However, for the reasons noted above, the evidence led in this application did not identify any factual or legal basis for a claim by ADF against CBA, and it does not seem to me that any need for advice by that firm as to that question presently arises in that situation.

Conclusion and orders

I am satisfied that the Receivers' approach to the identification of persons to whom an interim distribution should be made, or set aside pending adjudication of their claims, is appropriate. The matters raised by ADF do not seem to me to provide reason to decline leave for that interim distribution, particularly where, as the Receivers point out, even if an application to set aside the consent judgment were made and succeeded, or some other claim by ADF against CBA was identified and successfully pursued, and orders were made requiring CBA to repay dividends received by it, there is no reason to believe that it would not be able to do so. The Receivers also invited the Court to impose a condition upon any interim distribution, requiring CBA to repay it, if an order was made by a court which reduced, extinguished or gave rise to a set-off against the debt to which the proposed interim distribution was directed. I consider that leave should be granted to make the interim distribution, subject to a condition to that effect.
The parties should bring in agreed short minutes of order to give effect to this judgment and as to costs within 14 days or, if they cannot reach agreement, their respective draft short minutes of order and short submissions as to the differences between them. Other aspects of the proceedings are listed for directions on 9 March 2015 and APT may be heard on that date as to whether it seeks to pursue an application under s 423 of the Corporations Act in respect of the matters to which I have referred above, and as to any consequential steps which should be taken in that regard.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 28 January 2015

Civil Procedure Act 2001(NSW)s 101

Corporations Act 2001(Cth)ss 180, 181, 182, 420(1), 420(2), 420(2)(k), 423, 536, 1317H, 1321

Uniform Civil Procedure Rules 2005(NSW)rr 36.15, 36.16, 36.17, 36.18

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